Tuesday, 5 June 2012

Investing in shares: European Meltdown - Finding opportunities

In a previous post I outlined those areas which investors should probably avoid due to the uncertainty in the European investing environment.  In this post I will outline some areas where investors may find opportunities to get great value investments.

In my opinion the safest way to make good investment returns in Europe in the current prevailing environment is not to try and predict the way the markets will go or what business sectors will recover etc but rather to invest in those areas which are already fundamentally sound but which are being hit due to the general malaise in Europe.  It is the perfect buying environment for people who do not get emotionally involved in their investments because you can take advantage of terrible market sentiment to make great profits.  Not living in Europe is also a big advantage as you are removed from constant negative news flow etc and can focus purely on your companies and investments.

Below I have outlined areas where great investments can be found
  1. Companies listed in Europe which have no operations in Europe:  There are several Asian companies that listed in Europe over the last few years (presumably to get international exposure) which have no operations in Europe.  These companies are exposed to the highest growth economies in the world, have absolutely no exposure to Europe in a business sense but their share prices have been smashed along with the rest of the European share market.
  2. Small Cap stocks in Europe that are performing fundamentally well: In a 'risk off' environment like the one that currently prevails in Europe people only want to own the biggest 'blue chip' stocks and will not touch small caps with a ten foot pole because of their perceived riskiness regardless of how the business is doing.  As long as these businesses do not need to tap the funding markets they are a great place to find bargain investments.
  3. Companies listed and operating in 'strong' European countries like Germany:   The big uncertainty with Europe is whether the EU will stay together or whether countries like Greece, Spain, Portugal etc will leave the Euro.  The uncertainty is causing the Euro to remain depressed and is affecting companies and stocks in almost every market in Europe.  Countries like Germany are actually performing extremely well.  As soon as certainty returns to the market (regardless of the outcome) these stocks should perform well.  Even if the Euro collapses and Germany goes back to the Deutschmark this will be a much stronger currency than the Euro currently is (as the Euro is dragged down by the poorly performing countries) so as an investor you win either way.
One thing that should be noted with investments like this is that they will not come off straight away or even within one or two years.  As an investor you are waiting for the market to settle down and for investors to 'realise' that these companies that they have been shunning are actually really good investments which drive the price up.  You are waiting for market sentiment to return to normal (the business does not need to improve for you to get your return although this may provide an extra kicker).

Occasionally you can find stocks which conform to all the above criteria.  An example is Kinghero AG which is a stock I'm invested in - it is a small cap, German listed clothing manufacturer and retailer which only operates in China.  There are plenty of others out there - all you have to do is look for them.

Disclaimer: I'm long Kinghero AG.  Also make sure you do your own research and get advice relatign to your pesonal situation.  This is not meant to be investment advice and investors should do their own evaluations of opportunities and stocks.

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